All Quiet On The Western Front: Gaming M&A May Be In A Lull As A New Generation Grows Up

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When you step off the elevator into Kixeye’s new downtown San Francisco office, a guy in military fatigues has you sign an NDA. After you do (I didn’t), a receptionist with a lot of piercings takes your name, while The White Panda’s “Foolish Monsters” blares in the background. Kixeye has whale harpoons stapled to its office walls, bad oil paintings (see left), ceiling-to-floor drawings of fire-breathing dragons and jacked unicorns, a 3-D printer of questionable purpose and little desire to answer to anyone else.

All while remaining profitable, the midcore social gaming company has quintupled its headcount over the last year to more than 450 employees. The company says it has “several” times the $19 million in capital they raised stowed away in the bank.

Too expensive for acquirers and still too small and unproven for public markets, privately-held gaming companies like Kixeye are chugging along profitably and doing things their own way.

Meanwhile, across the Atlantic, other privately-held gaming companies such as Finland’s Rovio and Supercell, the U.K.’s King and Germany’s Wooga are also growing profitable businesses.

Buyers Beware

That feeling is mutual on the buyers’ side too. Warner Bros said last week that it would be opening a gaming studio in San Francisco. In other words, it is choosing to build, not buy.

“Every time we looked at a company that was really interesting, we found that the price tag was more money than we thought was reasonable to pay,” said Greg Ballard, who is Warner Bros. senior vice president of digital games.

“With regards to a large acquisition, we’re probably OK for the time being,” said Nick Earl, who oversees most of EA’s free-to-play games as a senior vice president there. “If the right deal presents itself, we would make that deal. But we’re not actively seeking it.” He said his arm of EA’s business, the All Play label, is putting more effort into a smaller number of games this year.

Basically, buyers and sellers are at odds over what these companies should be worth. Sellers want several times annualized revenues — based on the months where they have hits. Buyers have limited cash and are aware of how difficult it is to integrate acquisitions and retain talent in such a competitive market. GREE’s U.S. CEO Naoki Aoyagi told me in a panel at an event put on by investment bank Covert & Co. earlier this week that the company was much more careful about structuring retention with the $210 million deal to buy Funzio compared to the time that they spent $104 million to buy OpenFeint. He said he was much “happier” with the Funzio outcome, given that the co-founders have stayed on.

“There is a set of profitable, cash generating companies that feel they have a very legitimate shot at challenging the existing cadre of public game companies as the industry’s next leaders,” added Segerstrale, who didn’t comment specifically about Supercell. His early-stage firm Initial Capital is one of Supercell’s largest shareholders.

It’s possible that the big gaming companies could start to feel comfortable with public markets in a few years, if they have a broad enough portfolio of hit franchises. Companies like San Francisco’s Kabam, Seattle’s Big Fish Games and Finland’s Rovio already regularly report basic revenue figures to generate interest — either from future public shareholders or buyers.

IPO Window Still Feels Closed

Instead, this generation of gaming companies is biding its time, riding the wave of surging iOS and Android revenues and making sure that their businesses are more hit-proof.

“IPOs are fine, but there have also been scenarios where it was too much of a focus. Ultimately, they’ve been very destructive to companies that were doing notable and amazing things,” Barber said. “Those variables have to be weighed super carefully, so we’re not in a rush.”

King, an arcade-gaming company that started more than a decade ago, just made the leap to mobile last fall. Its game Candy Crush Saga has been competing with Supercell’s “Clash of Clans” for the top-grossing spot in the U.S. That single title blew through all of the’s company 2013 financial targets in a single month and brought them more mobile daily active users than Zynga had last quarter. They’ve quadrupled their headcount in the last two years ago, haven’t taken funding for eight and have always been profitable.

“We’re not planning to be acquired. There’s a bright future for us, whether we will do an IPO or not,” said King’s CEO Riccardo Zacconi. “We’re just working on execution.”